Waving goodbye to the days of the big bonus
The institutions in question were Bank of Ireland and Irish Life & Permanent, two of the biggest players in the Irish mortgage market.
That each was forced to stress the soundness of its finances is another reminder that the banks feel under pressure to respond to suggestions that the downturn in Irish construction and housing will see them struggle, as bad debts and global funding conditions put balance sheets under pressure.
Before Bank of Ireland issued its yearly results on Wednesday there was speculation it would also announce a rights issue.
That rumour proved unfounded. Instead, chief executive, Brian Goggin took the opportunity to reassure the press that it had no need to go to the market.
Both he and chief financial officer, John O’Donovan stressed that while the amount of funding BoI has from the markets was down, it had more than compensated for that dip through a substantial boost in deposits from international sources.
That the bank was able to raise deposits internationally reflects well on its standing. However, it is a worry that such suspicion about the health of Irish financial institutions still persists.
Brian Goggin pointed out at the press conference that it wasn’t Irish banks that were running to the markets looking for funding. They have not had to resort to such funding because the bank kept well away from sub prime loans, unlike so many banks globally now paying a heavy price.
He pointed out also that many of the banks who rowed in with the US banks on the repackaging of such loans did so without knowing what they were getting involved in. That’s a pretty serious accusation, but he’s not the first to make it and the fallout bears it out.
It’s ironic therefore that British fund managers, who saw Northern Rock go down the tubes and other major banks suffer losses, are still bad mouthing the Irish banking sector.
What the market seems to be suggesting is that because of the importance of the construction sector to the economy, banks will suffer to a greater or lesser extent as the property bubble works its way through over the next 18 to 24 months.
After BoI’s results made the headlines mid-week, Citigroup issued a review saying the slowdown here would hurt earnings going forward.
The markets reflected that view when the bank’s shares fell over 5% to close to €8. Prior to the housing slowdown the shares hit a high of €18.65 last year, but have been going down since.
And British fund managers in particular appear convinced that construction has the power to do to Irish banks what the subprime did to banking globally — bring them to their knees.
There is no doubt that banks will be left nursing a lot of under-employed staff as the demand for loans stays well below what that they had geared up to deliver.
Those analysts believe some banks will struggle because the flow of funds that underpinned their growth is no longer available to them.
Davy Stockbroker’s took a different view. The results contained no shocks and were bang in line with expectations, they said.
This debate will rumble on for some time, but it was interesting to note that, despite its negative tone, the Citigroup said BoI’s shares would rise to €9 from their current base of close to €8.
While it would be starry -eyed to suggest banks here will not face tougher times, the sense of foreboding that surrounds the entire sector has not been justified.
We have had no real shock announcement from anywhere in the Irish banking sector. One thing is certain however — the days of the big bonuses will be on hold for quite a while as this saga plays itself out.
